Personalized Rewards and Profitable Behavior: Case Studies

We’ve spent the better part of this year discussing customer loyalty and loyalty programs, which should be a fundamental focus of your business. I’ve talked about the theory and science behind loyalty programs and how to fashion them correctly. Today, we’ll look at two real-life examples that showcase two very different loyalty strategies. One is a run-of-the mill loyalty program that could benefit from personalization; the other is a good case study of rewarding profitable behavior.

Personalized Rewards

In a previous column, I discussed the need for personalized holidays. The idea is to celebrate and promote events that are specific to a user: anniversary of her first purchase with you, her birthday, and so on.

Extending this idea, the marriage of personalization and loyalty programs begets an entirely new type of reward program, one users actually have a stake in. In contrast to standard programs that give everyone the same rewards, personalized reward programs are really a dialogue between the company and the user. The user buys things he likes; the company understands those likes and rewards him appropriately.

Other loyalty programs simply behave like extended-life coupons. CVS’ ExtraCare card is an example. Its entire function seems to be giving users 2 percent off daily purchases and random coupons. Many retailers (including book- and grocery stores) have similar programs. There are no other interesting benefits to these programs, nor anything to differentiate them. Too many reward programs simply reward normal behavior: shopping with them. When every store has this same type of loyalty program, it amounts to an industry-wide discount. Moreover, the coupons I get at the bottom of my CVS receipt seem to have no correlation to my previous purchases.

A more interesting program, one that might actually build loyalty, offers personalized rewards. If I constantly buy shaving cream, razors, and shampoo from CVS, why would CVS waste my time with coupons for feminine hygiene products or stomach medication? Yet those are coupons I’ve gotten so far. I should receive coupons I could actually use. In the eight months I’ve been a member of the CVS program, I’ve never once found a coupon I’d use. The card hasn’t made me more loyal; CVS is my local pharmacy and I’d shop there regardless. The inane coupons have angered me. A poorly designed reward program can feel like a slap in the face. It’s bringing the fact of my loyalty front and center, showing me it isn’t investing time, energy, or money into understanding my needs.

Rewarding Profitable Behavior

Now, let’s look at a different tact altogether — and at someone doing it right.

Not too long ago, we discussed rewarding profitable behavior. Retailers have share-of-wallet issues with their customers. They must attract more business from them. On a micro level, this means creating more multicategory shoppers; those who buy products from categories X and Y. On a macro level, retailers must encourage multichannel consumers, as they’re more profitable than single-channel consumers.

These tasks can be accomplished in many ways. We specifically looked at how a loyalty program can be structured to reward this kind of behavior. This is important because we aren’t just rewarding someone for her natural behavior. Instead, we’re actually altering her behavior so she becomes more profitable over time.

SHOP.COM is even more “macro” than multichannel shopping: it’s multimerchant shopping. According to a recent report from shop.org, only about 10 percent of SHOP.COM’s orders contain products from multiple merchants. Clearly, multimerchant shopping is SHOP.COM’s differentiator. If only 10 percent of its customers take advantage of this, there isn’t really much to differentiate the SHOP.COM experience.

Recognizing this, SHOP.COM created a promotion geared toward rewarding multimerchant shopping. It’s offering free shipping on multimerchant purchases. Time will tell how effective this strategy is in the long term, but it’s the right approach. SHOP.COM is advertising its core differentiator and actively working to turn current single-merchant customers into multimerchant customers.

As we’ve discussed previously, a free-shipping promotion tends to fall into the continuous reward schedule category. This is the worst kind of promotion, due to the steep decay rate once the promotion is gone. This is perhaps the only downside to SHOP.COM’s strategy. But, because the campaign affects long-term behavior, the end of the campaign shouldn’t exhibit all the traditional negative effects of a continuous reward schedule, assuming the campaign effectively changes behavior.

Hopefully, SHOP.COM has the reporting capabilities to track consumers who take advantage of this offer. If so, I’d be interested in its findings in four to six months. If the campaign is successful, people will continue to shop with multiple merchants after the free shipping promotion is over, leading to more loyal, profitable long-term customers.

Do you have any case studies you’d like to share with me for this column? Let me know! And be sure to watch “CBS News Sunday Morning” on Christmas Day at 9 a.m. I’ll be featured as an industry expert on the loyalty programs and customer loyalty segment.